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Consumer confidence drops sharply as sequester takes hold

Close reading of index suggests economy may have not yet turned the corner

Mar 28, 2013

U.S. consumers have turned glum about the nation’s economic prospects, per the latest reading of The Conference Board’s closely watched Consumer Confidence Index. The index dropped by over 8 points in March— wiping out most of the gains it had attained in February from the month before.

The Index now stands at 59.7 (1985=100), which is down from February’s 68.0.

The two key components of the Index fell as well from February. The Present Situation Index decreased to 57.9 from 61.4 and the Expectations Index to 60.9 from 72.4.

“Consumer confidence fell sharply in March, following February’s uptick,” remarked Lynn Franco, director of economic indicators at The Conference Board. “This month’s retreat was driven primarily by a sharp decline in expectations, although consumers were also more pessimistic in their assessment of current conditions.

“The loss of confidence, particularly expectations, mirrors the losses experienced this past December and January,” she added. “The recent [federal-government] sequester has created uncertainty regarding the economic outlook and as a result, consumers are less confident.”

Going beyond the headlines, in his Beat the Pressblogeconomist Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) think tank, argued that not distinguishing between the two components of the Consumer Confidence Index can lead to a very faulty understanding of what it is indicating in any given month.

For starters, he stated that it is The Conference Board’s Present Situation component that “actually tracks current consumption reasonably closely, so it is giving us information about the economy.” As noted above, that index fell from 61.4 in February to 57.9 in March.

“By contrast,” wrote Baker, “the Expectations component [of the Consumer Confidence Index] is highly erratic and bears little relationship to actual consumption patterns. Reporters generally don't make a point of distinguishing between these two components. This can lead them to misinform the public about the economy.”

For example, he contended there were “many stories last fall highlighting falls in the Index based on the future expectations index [alone]. These drops were undoubtedly attributable to media accounts warning of the end of the world if we went off the ‘fiscal cliff.’ As we now know, consumption spending held up just fine through the fall.”

On the other hand, Baker stated that the recent fall in the Present Situation component “should be taken as a serious warning that consumers may be tightening their belts. That would not be a surprising response to the ending of the payroll tax cut, plus some amount of layoffs and cutbacks associated with the sequester.

“This is just one report among many,” he concluded, “but it does suggest that the recovery optimists singing about having finally turned the corner may be wrong.”